“Short-term savings can cost more in the long run.”
Rising food and energy prices are putting considerable pressure on European household budgets. Research shows that an increasing proportion of people’s income is being spent on essential purchases, with wages not keeping pace with rising prices. The result is that, despite Government intervention in most countries to help ease the financial pressure on households, it remains a worrying period as people frantically look for ways to reduce costs and maximise their income to ensure they keep a roof over their heads, food on their table and the lights on this winter.
The wise amongst us will have a household budget that splits out essential spending - on things such as mortgage payments or rent, utilities, and food - from non-essential expenditure on those things we can do without. The rationale is that, as long as we can pay for the essentials, whilst life may not be as fun, we will get through this current crisis.
However, some people are finding there are only so many ways to control costs and limit expenditure to ensure they can afford to pay their monthly bills, so they are looking for ways to make further savings.
An increasing number of people appear to be doing this by deciding whether essential expenditure is essential, with a focus on long-term financial products and insurance.
After all, isn’t putting money into a pension, a long-term savings plan, an investment product or paying for insurance you never use a little extravagant when cash is short – especially if retirement or whatever you are saving for is many years, if not decades, away?
On the face of it, people may see this as a sensible solution to what is, hopefully, a short-term cost of living issue. Whether it is the right approach will depend on an individual’s circumstances, but everyone needs to be aware of the implications of pausing or stopping pensions, saving, investment contributions and insurance – even if just for a short while.
Financial products are generally long-term. This means they seldom benefit from short-term changes, including starting or stopping payments. An example by Standard Life in the UK calculated that an “average person” who began work at the age of 22 with a salary of £25,000 per year and usually paid contributions of 8% a year would reduce their retirement fund by almost £13,000 if, at the age of 35, they stopped pension contributions for just one year!
Stopping insurance payments or cancelling insurance policies can have serious consequences too. Whether your policy will automatically lapse if you pause or cancel payments will depend on the type of policy, type of insurance and the insurer’s terms and conditions. Some whole life assurance policies and long-term savings plans may pay out less than you have paid in, and you should also be aware that you can face much higher premiums when you restart a policy and could have exclusions or conditions imposed on you. For example, medical insurance will consider any new pre-existing medical conditions, and life insurance premiums will be calculated using your current age and health rather than your age and health when you initially took the policy out.
It can be hard to know if you’re making the right decisions when pausing or cancelling payments for financial products and insurance, and it is tempting to act when money pressures are high as you feel it gives you control. Nonetheless, it is always essential to understand the real impact of any decision before you make it and weigh it up against the perceived benefits, as, often, short-term saving doesn’t justify the cost in the long run.
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